(16 December 2019)DAILY MARKET BRIEF 1:De-escalating trade tensions are moderately comforting

By Vincent Mivelaz

Last week hectic agenda finally looked much better than initially feared as both Brexit and US – China trade headlines appeared more than satisfying while the Fed seems holding to its plan. The change of rhetoric from early December when both sides appeared more cautious on the outcome of the interim trade deal after the US administration approval of the Hong Kong Human Rights Democracy Act and the Uighur Bill forces investors to stay wary until official ratification. The effective implementation of the first phase agreement is expected to be a pain for Beijing in spite of the commitment to double US imports at the expenses of trade diversification and its main trading partners. Meanwhile, the major blow to the World Trade Organization after the Trump administration decision to block the appointment of the seven-member Appelate Body confirms the current US administration stance with regard to multilateral trade. With the release of PMIs in the US, expected to have stabilized in December, the greenback is set for a rebound short-term.

The nine chapters long trade deal that includes topics such as agriculture, conflict resolution, currency stability, IP, technology transfer, and trade expansion, expected to be signed on January 2020 according to announcements, should engage China to increase US imports in the coming two years, implement tighter IP protection rules and also consists of tariffs reduction and suspension. In details, China would pledge to buy a total of $40 billion ($24 billion in 2017) of US agricultural products annually and expand total imports to $200 billion in the coming two years. In counterpart, the US would cut existing 15% tariffs on $120 billion Chinese products to half while both sides would suspend 15 December 2019 tariffs, still below Chinese expectations of a reduction to existing 25% tariffs on $250 billion. Considering the rebound of industrial production and retail sales in November to 6.20% (prior: 4.70%) and 8% (prior: 7.20%) respectively, it appears that the Chinese economy has stabilized, with local authorities supporting growth through infrastructure spending and further easing of monetary policy expected. Although a Phase Two agreement is limited, the escalation of trade tensions is expected to ease in 2020 after the signing of the first agreement in the context of the US election race.

By Vincent Mivelaz